Icahn School of Medicine at Mount Sinai Years Ended December 31, 2015 and 2014 With Report of Independent Auditors

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1 C ONSOLIDATED F INANCIAL S TATEMENTS Years Ended December 31, 2015 and 2014 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements Years Ended December 31, 2015 and 2014 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Statements of Financial Position...3 Consolidated Statement of Activities Year Ended December 31, Consolidated Statement of Activities Year Ended December 31, Consolidated Statements of Cash Flows...6 Notes to Consolidated Financial Statements...7

3 Ernst & Young LLP 5 Times Square New York, NY Tel: Fax: ey.com The Board of Trustees Mount Sinai Health System, Inc. Report of Independent Auditors We have audited the accompanying consolidated financial statements of the Icahn School of Medicine at Mount Sinai, which comprise the consolidated statements of financial position as of December 31, 2015 and 2014, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the at December 31, 2015 and 2014, and the consolidated results of its operations and changes in its net assets and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. March 31, 2016 EY 2 A member firm of Ernst & Young Global Limited

5 Consolidated Statements of Financial Position (In Thousands) December Assets Cash and cash equivalents $ 42,913 $ 40,564 Short-term investments 46,979 16,482 Total cash and cash equivalents and short-term investments 89,892 57,046 Patient accounts receivable, less allowance for doubtful accounts of $47,050 and $48,128 in 2015 and 2014, respectively 100,682 77,517 Due from New York City Health and Hospitals Corporation 4,968 Loans receivable: Employees 75,866 65,946 Students 16,692 17,337 Pledges receivable, net 104, ,294 Other assets 42,287 35,085 Assets limited as to use under debt financing arrangements 92,043 85,442 Professional liabilities insurance recoveries receivable 152, ,658 Pooled investments, including permanently restricted investments of $371,979 in 2015 and $362,573 in , ,372 Other investments 20,702 20,987 Property, plant, and equipment, net (including net deferred financing charges) 962, ,018 Total assets $ 2,316,779 $ 2,312,670 Liabilities and net assets Accounts payable and accrued expenses $ 47,875 $ 46,911 Accrued construction liabilities Accrued salaries, wages, and related liabilities 78,223 63,744 Accrued interest payable 11,405 15,199 Deferred revenue and refundable advances 45,392 65,634 Due to related organizations, net 200, ,794 Due to New York City Health and Hospitals Corporation 2,064 Federal loan capital advances 4,747 4,747 Employee relocation loan program 63,916 54,816 Postretirement health benefit obligations 12,260 13,492 Professional liabilities 152, ,658 Long-term debt 683, ,994 Total liabilities 1,302,456 1,187,707 Commitments and contingencies Net assets: Unrestricted 287, ,439 Temporarily restricted 325, ,391 Permanently restricted 401, ,133 Total net assets 1,014,323 1,124,963 Total liabilities and net assets $ 2,316,779 $ 2,312,670 See accompanying notes. 3

6 Consolidated Statement of Activities Year Ended December 31, 2015 (In Thousands) Temporarily Restricted Permanently Restricted Unrestricted Total Revenue, gains, support and reclassifications: Net patient care services $ 878,411 $ $ $ 878,411 Federal grants and contracts 329, ,532 Private gifts, grants, and contracts 136,942 53,901 7, ,333 New York City Health and Hospitals Corporation 214, ,032 CARTS transfers: The Mount Sinai Hospital 210, ,959 Other related hospitals 52,913 52,913 Investment income allocated to operations 34,192 4,761 38,953 Royalty revenue 52,824 52,824 Tuition and fees 29,911 29,911 Other support 59,780 59,780 1,998,746 59,412 7,490 2,065,648 Net assets released from restrictions 54,660 (54,660) Total revenue, gains, support, and reclassifications 2,053,406 4,752 7,490 2,065,648 Expenses: Program services: Patient care services 1,146,869 1,146,869 Sponsored research 304, ,157 Basic and clinical sciences 291, ,577 Scholarships 4,218 4,218 Total program services 1,746,821 1,746,821 Support services (management and general): General administration and support services 318, ,961 Total expenses 2,065,782 2,065,782 (Decrease) increase in net assets before investment return earned less than amounts allocated to operations and loss on refunding of long-term debt (12,376) 4,752 7,490 (134) Investment return earned less than amounts allocated to operations (23,900) (15,940) (39,840) Loss on refunding of long-term debt (70,666) (70,666) (Decrease) increase in net assets (106,942) (11,188) 7,490 (110,640) Net assets at beginning of year 394, , ,133 1,124,963 Net assets at end of year $ 287,497 $ 325,203 $ 401,623 $ 1,014,323 See accompanying notes. 4

7 Consolidated Statement of Activities Year Ended December 31, 2014 (In Thousands) Temporarily Restricted Permanently Restricted Unrestricted Total Revenue, gains, support and reclassifications: Net patient care services $ 671,358 $ $ $ 671,358 Federal grants and contracts 300, ,196 Private gifts, grants, and contracts 125,789 35,848 15, ,274 New York City Health and Hospitals Corporation 211, ,232 CARTS transfers: The Mount Sinai Hospital 193, ,667 Other related hospitals 3,454 3,454 Investment income allocated to operations 34,360 5,045 39,405 Royalty revenue 46,046 46,046 Tuition and fees 28,904 28,904 Other support 58,047 58,047 1,672,394 41,552 15,637 1,729,583 Net assets released from restrictions 63,388 (63,388) Total revenue, gains, support, and reclassifications 1,735,782 (21,836) 15,637 1,729,583 Expenses: Program services: Patient care services 879, ,963 Sponsored research 274, ,905 Basic and clinical sciences 282, ,703 Scholarships 3,885 3,885 Total program services 1,441,456 1,441,456 Support services (management and general): General administration and support services 292, ,676 Total expenses 1,734,132 1,734,132 Increase (decrease) in net assets before investment return earned (less) greater than amounts allocated to operations 1,650 (21,836) 15,637 (4,549) Investment return earned (less) greater than amounts allocated to operations (502) Increase (decrease) in net assets 1,148 (21,079) 15,637 (4,294) Net assets at beginning of year 393, , ,496 1,129,257 Net assets at end of year $ 394,439 $ 336,391 $ 394,133 $ 1,124,963 See accompanying notes. 5

8 Consolidated Statements of Cash Flows (In Thousands) Year Ended December Operating activities Decrease in net assets $ (110,640) $ (4,294) Adjustments to reconcile decrease in net assets to net cash provided by operating activities: Depreciation and amortization 83,612 80,605 Loss on refunding of long-term debt 70,666 Amortization of bond discount and premium, net (2,242) (1,177) Contributions to permanently restricted net assets (7,490) (15,637) Change in net unrealized gains and losses on investments 31,769 (18,563) Changes in operating assets and liabilities: Pledges receivable 23,468 2,413 Patient accounts receivable, net (23,165) (7,650) Due to related organizations, net 50,673 22,227 Accounts payable, accrued expenses, and accrued construction liabilities 549 (5,610) Accrued salaries, wages, and related liabilities 14,479 6,206 Employee relocation loan program 9,100 5,148 Net change in other operating assets and liabilities (25,438) 6,768 Net cash provided by operating activities 115,341 70,436 Investing activities Net increase in loans receivable (9,275) (6,568) Investments in fixed assets and projects in process (87,332) (87,974) Net increase in investments (3,870) (11,464) (Increase) decrease in assets limited as to use under debt financing arrangements (6,601) 6,341 Net cash used in investing activities (107,078) (99,665) Financing activities Contributions to permanently restricted net assets 7,490 15,637 Proceeds from issuance of long-term debt 560,836 Refunding of long-term debt (546,960) Principal payments on long-term debt and capital lease obligations (23,757) (18,912) Payment of deferred financing costs (3,523) Net cash used in financing activities (5,914) (3,275) Net increase (decrease) in cash and cash equivalents 2,349 (32,504) Cash and cash equivalents at beginning of year 40,564 73,068 Cash and cash equivalents at end of year $ 42,913 $ 40,564 Supplemental disclosure of cash flow information Cash paid during the year for interest $ 31,359 $ 31,435 See accompanying notes. 6

9 Notes to Consolidated Financial Statements December 31, Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The (the School) is a teaching and research institution that educates physicians, biomedical scientists and medical students for careers in the practice of medicine, the delivery of health care and the pursuit of medical research. It grants both MD and PhD degrees. The School is closely affiliated with The Mount Sinai Hospital (the Hospital) and its affiliates, although the School is managed separately and is a separate legal entity. The School and the Hospital share a four-block area campus on the Upper East Side of Manhattan. The accompanying consolidated financial statements include the accounts of the School and Mount Sinai Children s Center Foundation, Inc. (CCF), a not-for-profit organization formed in 1989, of which the School is the sole member, Mount Sinai Care, LLC (the ACO), organized for the purpose of and operated as an accountable care organization, of which the School is the sole member, the Mitral Foundation, a not-for-profit organization formed in 2009, and Valentin Fuster Mount Sinai Foundation for Science, Health, and Empowerment (the Foundation), a not-for-profit organization formed in On September 30, 2013, the School, the Hospital and The Mount Sinai Medical Center, Inc. (the Medical Center, and together with the School and the Hospital, the Mount Sinai Entities) consummated a transaction pursuant to which the Mount Sinai Entities and Beth Israel Medical Center (BIMC), The St. Luke s-roosevelt Hospital Center (SLR), and the New York Eye and Ear Infirmary (NYEEI) came together to create the Mount Sinai Health System, an integrated health care system and academic medical center (the Transaction). Pursuant to the Transaction, two new not-for-profit entities were formed: Mount Sinai Health System, Inc. (MSHS) and Mount Sinai Hospitals Group, Inc. (MSHG). MSHG was formed to be the sole member of the Hospital, BIMC, SLR, and NYEEI. MSHS was formed to be the sole member of MSHG, the School and Medical Center. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 7

10 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) In the accompanying consolidated financial statements, estimates principally relate to the valuation of net accounts receivable, estimated professional liabilities and related insurance recoveries receivable and the carrying value of alternative investments. Management believes that the amounts recorded based on estimates and assumptions are reasonable and any differences between estimates and actual should not have a material effect on the School s consolidated financial position. Related Organizations Transactions between the School and its related organizations, relating principally to the sharing of certain facilities, equipment and personnel are accounted for on the basis of allocated cost. Amounts due to or from related organizations are currently receivable or payable and do not bear interest. All intercompany transactions and balances with CCF, the ACO, the Foundation and the Mitral Foundation have been eliminated in consolidation. Summarized financial information for CCF is as follows (in thousands): December Total assets $ 1,572 $ 1,158 Net assets $ 1,572 $ 1,158 Year Ended December Total revenue $ 802 $ 600 Total expenses Increase in net assets $ 414 $ 90 8

11 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents The School considers highly liquid financial instruments purchased with a maturity of three months or less, excluding those held in its long-term investment portfolio and assets limited as to use under debt financing arrangements, to be cash equivalents. The School has balances in financial institutions that exceed Federal depositing insurance limits. Management does not believe the credit risk related to these deposits to be significant. Patient Accounts Receivable/Allowance for Doubtful Accounts Patient accounts receivable result from the health care services provided by the School s faculty practices. Additions to the allowance for doubtful accounts result from the provision for bad debts. Accounts written off as uncollectible are deducted from the allowance for doubtful accounts. The amount of allowance for doubtful accounts is based upon management s assessment of historical and expected net collections, business and economic conditions, trends in Medicare and Medicaid health care coverage and other collection indicators. See Note 2 for additional information relative to third-party payor programs. The School grants credit without collateral to its patients, most of whom are insured under third-party agreements. The significant concentrations of accounts receivable for services to patients include: December Medicare 17% 18% Medicaid Managed care and commercial Other % 100% Approximately 41% of the School s net patient care services revenue was from Medicare and Medicaid programs in 2015 and

12 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Assets Limited As to Use Under Debt Financing Arrangements Assets limited as to use under debt financing arrangements are invested in fixed income securities and are carried at fair value. Income from assets limited as to use is recognized in the accompanying consolidated statements of activities with return on long-term investments. Investments The majority of the School s investments, with the exception of short-term investments, real estate-related amounts due from or invested in affiliate (see Note 5) and approximately $21 million at December 31, 2015 and 2014 that are separately invested funds, are in a pooled investment portfolio maintained for the benefit of the Hospital, the Medical Center, BIMC, SLR, NYEEI and the School. In 2014, custody of investments held in the investment pool was transferred to the Medical Center and the Medical Center was named as the owner of record of each of the investments; in prior years, the investment pool assets were held in custody of the various pool participants. Consequently, the Medical Center records all of the pooled investments in its financial statements, with a corresponding liability due to each of the participants in the investment pool for their respective share of the pooled investments; the pool participants report their respective share of the investment pool as pooled investments. Investment earnings on the pooled investments are recorded by the pool participants, based on their pro rata share of the pool s investment returns. Investments consist of cash and cash equivalents, U.S. government and corporate bonds, money market funds, equity securities and interests in alternative investments. Debt securities and equity securities with readily determinable values are carried at fair value based on independent published sources (quoted market prices). Alternative investments (nontraditional, not readily marketable securities) may consist of equity, debt and derivatives both within and outside the U.S. in multi-strategy hedge funds, event-driven strategies, global investment mandates, distressed securities and private funds. Alternative investment interests generally are structured such that the investment pool holds a limited partnership interest or an interest in an investment management company. The investment pool ownership structure does not provide for control over the related investees and the investment pool s financial risk is limited to the carrying amount reported for each investee, in addition to any unfunded capital commitment. 10

13 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Future funding commitments by members of the investment pool for alternative investments aggregated approximately $208.4 million at December 31, Individual investment holdings within the alternative investments include nonmarketable and market-traded debt and equity securities and interests in other alternative investments. The School may be exposed indirectly to securities lending, short sales of securities and trading in futures and forward contracts, options and other derivative products. Alternative investments often have liquidity restrictions under which the pooled investment capital may be divested only at specified times. The liquidity restrictions range from several months to ten years for certain private equity investments. Liquidity restrictions may apply to all or portions of a particular invested amount. Alternative investments in the pool are stated based upon net asset values derived from a practical expedient. Fair value is determined by management for each investment based upon net asset values derived from the application of the equity method of accounting, as a practical expedient. Financial information used to evaluate alternative investments is provided by the respective investment manager or general partner and includes fair value valuations (quoted market prices and values determined through other means) of underlying securities and other financial instruments held by the investee, and estimates that require varying degrees of judgment. The financial statements of the investee companies are audited annually by independent auditors, although the timing for reporting the results of such audits does not coincide with the School s annual financial statement reporting. There is uncertainty in determining fair values of alternative investments arising from factors such as lack of active markets (primary and secondary), lack of transparency into underlying holdings, time lags associated with reporting by the investee companies and the subjective evaluation of liquidity restrictions. As a result, the estimated fair values might differ from the values that would have been used had a ready market for the alternative investment interests existed and there is at least a reasonable possibility that estimates will change. Investment Income Investment income is allocated to investment pool participants using the market value unit method. The annual spending rate for pooled funds is approved by the Board of Trustees annually and is based on total return. Realized gains and losses from the sale of securities are computed using the average cost method. 11

14 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) The School also recognizes investment income (realized and unrealized) pertaining to permanently restricted investments held by the Medical Center on its behalf. The total investment return (investment income and realized and unrealized gains and losses) is reflected in the accompanying consolidated statements of activities in two portions. The investment return allocated to operating revenues (revenue, gains, support and reclassifications) is determined by application of a 5% normal return to a three-year average market value of investments, excluding certain permanently restricted assets and certain other funds (the annual 5% endowment spending rate). In addition, actual investment earnings on short-term funds, principally trustee-held assets for construction projects, are included in operating revenues. The investment return classified outside of operating revenues represents the favorable or unfavorable difference between the actual total investment return and the amount allocated to operating revenues. Property, Plant, and Equipment Property, plant, and equipment, including leasehold improvements, are stated at cost; those acquired through contributions are stated at fair value established at the date of contribution. The carrying amounts of assets and the related accumulated depreciation and amortization are removed from the accounts when such assets are disposed of and any resulting gain or loss is included in operating results. Annual provisions for depreciation and amortization are made based upon the straight-line method over the estimated useful life of the assets ranging from 5 to 50 years. Fixed assets are written off when they are fully depreciated and no longer in use. Depreciation expense for the years ended December 31, 2015 and 2014 was approximately $83.6 million and $80.6 million, respectively. The School has entered into long-term leases with the Hospital relating to the portion of the Hospital-owned Annenberg and Guggenheim buildings used by the School. Under the leases, the School makes payments for its share of the buildings operating expenses. Deferred Financing Charges Deferred financing charges, included within property, plant, and equipment in the accompanying consolidated statements of financial position, represent costs incurred to obtain financing for construction and renovation projects at the School. Amortization of these costs is provided using the effective interest method over the term of the applicable indebtedness. See Note 8 for additional information relative to debt-related matters. 12

15 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Revenue Recognition The School records grants and earned revenues on an accrual basis. In addition, the School records as revenue the following types of contributions, when they are received unconditionally, at their fair value: cash, promises to give (pledges) and other assets. Conditional contributions, including grants for sponsored research, are recognized as revenue when the conditions on which they depend have been substantially met. Contributions are recorded net of estimated uncollectible amounts and promises to give that are due in future years are discounted to present value. Contributions are reported as either temporarily or permanently restricted if they are received with donor-imposed stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying consolidated statement of activities as net assets released from restrictions. Donor-restricted contributions, including grants for sponsored research, whose restrictions and conditions are met within the same year as the contributions are received, are reflected in the activities of the unrestricted net asset class. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the School has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the School in perpetuity. Income earned therefrom is unrestricted or temporarily restricted based upon donors stipulations. Tax Status The School, CCF, the Foundation and the Mitral Foundation are Section 501(c)(3) organizations exempt from Federal income taxes under Section 501(a) of the Internal Revenue Code. The School, CCF, and the Mitral Foundation are also exempt from New York State and City income taxes. The ACO is a single member limited liability company that is not recognized as a separate legal entity for tax purposes. The ACO is considered to be a disregarded entity for tax purposes. As a disregarded entity, the School is subject to unrelated business income taxation should the ACO s income be derived from activities unrelated to the School s exempt purpose. 13

16 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Professional Liabilities The undiscounted estimate of professional liabilities and the estimate for incidents that have been incurred but not reported is included in the accompanying consolidated statements of financial position at the actuarially determined present value of approximately $152.4 million based on a discount rate of 3% at December 31, 2015 ($145.7 million at December 31, 2014). The School has recorded related insurance recoveries receivable of the same amounts in consideration of expected insurance recoveries. The School s estimate of professional liabilities is based upon complex actuarial calculations which utilize factors such as historical claims experience for the School and related industry factors, trending models, estimates for the payment patterns of future claims and present value discount factors. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Revisions of estimated amounts resulting from actual experience differing from projected expectations are recorded in the period the information becomes known or when changes are anticipated. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers. The core principle of ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU supersedes the FASB s current revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance. The FASB subsequently issued ASU , Revenue from Contracts with Customers, which deferred the effective dates of ASU Based on ASU , the provisions of ASU are effective for the School for annual reporting periods beginning after December 15, Early application is permitted only as of annual reporting periods beginning after December 15, The School has not completed the process of evaluating the impact of ASU on its consolidated financial statements. 14

17 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) In August 2014, the FASB issued ASU , Presentation of Financial Statements Going Concern, that will require management of public and nonpublic companies to evaluate and disclose where there is substantial doubt about an entity s ability to continue as a going concern. The amendments are effective for annual periods ending after December 15, 2016, and for annual periods thereafter. Early application is permitted. In April 2015, the FASB issued ASU , Simplifying the Presentation of Debt Issuance Costs. ASU requires debt issuance costs related to a recognized debt liability to be presented in the statement of financial position as a direct deduction from the corresponding debt liability rather than as an asset. This change will make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. The recognition and measurement guidance for debt issuance costs is not affected. The provisions of ASU are effective for the School for annual reporting periods beginning after December 15, 2015, with retrospective application to all periods presented. Early application is permitted. The School has not yet adopted ASU Adoption of ASU would result in the reclassification of deferred financing charges of $4.5 million at December 31, 2015 to long-term debt in the accompanying consolidated financial statements. In April 2015, the FASB issued ASU , Intangibles Goodwill and Other Internal-Use Software. ASU requires the School to determine whether a software contracting arrangement contains a software license element. If so, the related fees paid are accounted for as consistent with the acquisition of other software licenses; if not, the arrangement is accounted for as a service contract. The provisions of ASU are effective for the School for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, An entity adopting ASU may apply it either prospectively to new cloud computing arrangements or retrospectively. The School has not adopted this ASU and does not believe it will have a material effect on the accompanying consolidated financial statements. In May 2015, the FASB issued ASU , Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent). ASU removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by Accounting Standards Codification 820, Fair Value Measurement. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. 15

18 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) ASU is effective for entities (other than public business entities) for fiscal years beginning after December 15, 2016, with retrospective application to all periods presented. Early adoption is permitted. The School has elected to adopt ASU for the year ended December 31, In February 2016, the FASB issued ASU , Leases, that will require lessees to report most leases on their statement of financial position, but recognize expenses on their income statement in a manner similar to current accounting. The guidance also eliminates current real estatespecific provisions. Lessors in operating leases continue to recognize the underlying asset and recognize lease income on either a straight-line basis or another systematic and rational basis. The provisions of ASU are effective for the School for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The School has not completed the process of evaluating the impact of ASU on its consolidated financial statements. Reclassifications Certain reclassifications have been made to 2014 balances previously reported in order to conform with the 2015 presentation. 2. Net Patient Care Services Revenue Full-time faculty members may participate in the School s faculty practice plan, the activities of which are included in the accompanying consolidated statements of activities in net patient care services revenue. During 2015, certain physicians of BIMC and SLR became full-time faculty members of the School. As a result, the financial activities related to these faculty members are included in the accompanying consolidated statement of activities in net patient care service revenue from the date of the transfer of their practices to the School through December 31, 2015 (approximately $151.5 million). Their costs of practice for the same period also are included in the accompanying consolidated statement of activities (approximately $194.1 million in 2015). Plan participants are authorized to conduct a private practice and engage in professional consultation in accordance with established institutional guidelines. Professional service fee receipts are recorded and deposited in private practice funds established by the School for each individual participant or group practice when received by the School. Portions of these receipts are used to support School activities and to reimburse the School for indirect costs incurred in supporting plan activities. 16

19 2. Net Patient Care Services Revenue (continued) The remaining amounts, after direct plan expenses, provide participant salary supplements and support School departmental activities. The School participates in the Hospital s professional and general liability insurance programs. A similar arrangement exists for School physicians at Elmhurst Hospital Center (Elmhurst) and Queens Hospital Center (Queens). These receipts are used to support certain services previously funded under agreements with New York City Health and Hospitals Corporation (HHC), provide salary supplements for physicians and support the School s departmental activities at Elmhurst and Queens. The School s faculty practice plan has agreements with third-party payors that provide for payments to the plan. Payment arrangements include prospectively determined rates, reimbursed costs, discounted charges and fee-for-service. Net patient care service revenue and related accounts receivable are reported at the estimated net realizable amounts from patients, third-party payors and other for services rendered. The current Medicaid, Medicare and other third-party payor programs in which the School and its faculty participate are based upon extremely complex laws and regulations that are subject to interpretation. Noncompliance with such laws and regulations could result in fines, penalties and exclusions from such programs. The School is not aware of any allegations of noncompliance that could have a material adverse effect on the consolidated financial statements and believes that it is in compliance, in all material respects, with all applicable laws and regulations. 17

20 3. Pledges Receivable Pledges receivable, representing unconditional promises to give to the School, recorded net of a present value discount (based on a range of interest rates of 0.13% to 8.00%) and valuation allowance, consist of the following (in thousands): December Temporarily restricted $ 89,228 $ 111,241 Permanently restricted 22,103 24,270 Unconditional promises to give before discount to present value and valuation allowance 111, ,511 Less present value discount and valuation allowance 6,505 7,217 Net pledges receivable $ 104,826 $ 128,294 Pledges receivable are due to be collected over the following periods (in thousands): December Within one year $ 44,399 $ 46,900 One to five years 47,587 71,641 More than five years 19,345 16,970 Total pledges receivable $ 111,331 $ 135,511 18

21 3. Pledges Receivable (continued) The School is party to a pledge agreement of $150 million among the School, the Hospital, Carl C. Icahn (the Donor) and The Icahn Medical Research Foundation (the Icahn Foundation). The pledge will paid by the Donor to the Icahn Foundation solely for use by the Icahn Institute of Medical Research at Mount Sinai LLC (the MRO), a single member limited liability company of which the Icahn Foundation is the sole member, to conduct research in conjunction with the School and Hospital pursuant to terms of a collaboration agreement. The purpose of the collaboration agreement and the establishment of the MRO is to enable the School, the Hospital, the Icahn Foundation and the MRO to closely cooperate in a joint effort to conduct research in the fields of genomics, multi-scale biology and related matters. The pledge is not recorded in the accompanying consolidated financial statements. The outstanding pledge receivable balance is approximately $137.5 million as of December 31, Agreements With the New York City Health and Hospitals Corporation Pursuant to various agreements with HHC, the School provides professional, medical and other services for the operations of Elmhurst and Queens. For services provided under the agreements, the School is reimbursed for costs incurred, plus overhead, but not in excess of amounts specified in the agreements. Certain costs are funded by the operations of faculty practice group arrangements at Elmhurst and Queens, which are independent of other School programs, under a letter of understanding with HHC. The agreements with HHC do not permit the accrual of vacation and retirement benefits. The School would be liable for such benefits only upon termination of the agreements; however, the School s liability would be limited upon termination of the agreements to amounts due based on benefits policies in effect at that time. No liability for such benefits has been recorded by the School. The School s arrangements with HHC are subject to final settlements based on future audits; however, the School anticipates that the effects of future final settlements will not be material. 19

22 5. Related Organizations Amounts due (to) from the School s related organizations consisted of the following (in thousands): December The Mount Sinai Medical Center, Inc. $ 1,283 $ 1,245 MSMC Realty Corporation (20,299) (20,299) The Mount Sinai Hospital (193,817) (132,674) 8 East 102 nd Street LLC (40) 606 Beth Israel Medical Center 11,932 1,282 The St. Luke s-roosevelt Hospital Center (320) (218) New York Eye and Ear Infirmary Due to related organizations, net $ (200,467) $ (149,794) Transactions charged (at cost) by the Hospital to the School totaled approximately $1.3 billion and $1.1 billion during the years ended December 31, 2015 and 2014, respectively. These transactions include payroll and benefits charges, approximately 93% in 2015 and 92% in 2014, of the respective totals, and approximately 7% in 2015 and 8% in 2014, related to various other shared services. Included in the benefits charges are certain employee health plan claims and premiums which are paid by the Hospital and, subsequently, charged to the School. Accordingly, the Hospital recognizes an actuarially determined liability for unreported health claims on behalf of the School. These claims are recorded as expenses in the School s consolidated statements of activities. Additionally, the Hospital purchases professional services from the School for the clinical care of its patients, teaching and supervision of its residents, the performance of certain administrative functions, and various strategic initiatives (CARTS transfers). The Hospital paid approximately $226.9 million and $206.1 million in 2015 and 2014, respectively, for these and related services. The School reflects in its consolidated financial statements transfers from the Hospital to fund the School s community practice plan deficits (approximately $36.2 million in each of 2015 and 2014). Additionally, the Hospital funded in 2015 and 2014 approximately $0.2 million and $4.0 million, respectively, to the ACO. 20

23 5. Related Organizations (continued) At December 31, 2015 and 2014, the School owed approximately $29.2 million to the Hospital in relation to capital building projects that are under construction. Transactions charged (at cost) by the School to BIMC, SLR and NYEEI totaled approximately $17.1 million, $12.9 million and $0.5 million, respectively, during the year ended December 31, 2015, and $4.3 million, $3.9 million and $0.3 million, respectively, during the year ended December 31, These transactions include payroll and benefits charges and various other shared services. During 2003, as part of a financing transaction with the Hospital and MSMC Realty Corporation (Realty Corp.), a related entity, the School contributed to MSMC Residential Realty LLC (MSMCRRC), at net book value, property totaling approximately $55.8 million. MSMCRRC was incorporated in 2003 under the New York State Not-for-Profit Corporation Law for the sole purpose of supporting its member corporations by managing, maintaining, holding, developing, acquiring or disposing of real property for their benefit. MSMCRRC s members are the Hospital, the School, Realty Corp. and MSMC Residential Realty Manager, Inc. Property and equipment contributed by the Hospital, the School and Realty Corp. were used by MSMCRRC to secure $125.0 million in financing from a bank which was subsequently increased to $145.0 million as part of a refinancing in The total amount received by the School of approximately $34.4 million (comprised of $18.2 million used to repay the School s commercial paper program and a $16.2 million receivable after the initial financing), was based on the relative fair value of the property contributed, as compared to properties contributed by the Hospital and Realty Corp. that were part of the $125.0 million financing. During 2006, the School received the remaining balance of the $16.2 million initially recorded as receivable and received additional amounts totaling $7.6 million through December 31, At December 31, 2008, these additional amounts were settled with the School through funding provided by Realty Corp. As a result of the funding provided by Realty Corp., the School has $20.3 million due to Realty Corp. at December 31, 2015 and At December 31, 2008, the School had an interest in the fair value of the net assets of MSMCRRC of approximately $21.4 million, representing the excess of the carrying value of the property contributed over the amounts received. During 2009, MSMCRRC sold certain property and the School received approximately $42.0 million, including amounts distributed to the School by the Hospital and Realty Corp. $21.4 million of the amount received in

24 5. Related Organizations (continued) reduced the carried interest in the fair value of MSMCRRC net assets. During 2015, the School received approximately $0.6 million in distributions from MSMCRRC, the Hospital and Realty Corp. ($1.6 million in 2014). Total assets and liabilities, at book value, of MSMCRRC are as follows (in thousands): December Total assets $ 106,263 $ 103,928 Total liabilities (148,644) (148,763) Net deficit $ (42,381) $ (44,835) In December 2001, Realty Corp. entered into a $16.0 million loan agreement with the New York City Industrial Development Agency which was collateralized by a bank letter of credit that was guaranteed by the School and the Medical Center. The outstanding balance was $11.9 million at December 31, 2013, and the loan was repaid in full in October The letter of credit was terminated in October Summarized financial information for Realty Corp., in which the Hospital, the School and the Medical Center are members, at December 31 is as follows (in thousands): December Total assets $ 25,874 $ 25,878 Total liabilities (20,876) (20,880) Net assets $ 4,998 $ 4,998 During 2010, 8 East 102 nd Street LLC (the Company) was formed for the sole purpose of supporting its member corporation by managing, maintaining, holding, developing, acquiring or disposing of real property for its benefit. The Company s sole member is 8 East 102 nd Street Manager LLC (the Manager). The members of the Manager are the Hospital, the School and the Medical Center. Through December 31, 2013, the School transferred approximately $138.0 million in capital expenditures for a residential tower project to the Company, which financed and owns a portion of the project (none subsequently). 22

25 5. Related Organizations (continued) On November 1, 2013, the members of the Manager, together with certain other persons, amended and restated the operating agreement of the Manager and elected for the Manager to be taxed as a real estate investment trust (the REIT) for U.S. Federal income tax purposes, effective January 1, As a result, the members own 99% of the partnership units of the REIT; 125 investors each purchased preferred shares of the Manager for $1,000 each. The School, the Hospital and the Medical Center, as members of the Manager, have agreed to distribute the net activities of the Manager (which, as the sole member of the Company, reflects the net activities of the Company) solely to the School. This agreement includes equity in income or loss of the Manager, as well as cash distributions. Accordingly, in the accompanying consolidated financial statements, the School has recognized equity in income of related party of approximately $3.4 million in 2015 ($1.5 million in 2014). In 2015, the Manager distributed to the School approximately $8.5 million of cash derived from the net activities of the Company ($9.8 million in 2014). Summarized financial information for the Manager at December 31, 2015 is as follows (in thousands): December Total assets $ 124,287 $ 130,264 Total liabilities (144,763) (146,625) Members deficit (including noncontrolling interest of $2,690 in 2015 and $1,798 in 2014) $ (20,476) $ (16,361) 23

26 5. Related Organizations (continued) In August 2014, the Hospital entered into a transaction pursuant to which the Hospital obtained approximately 450,000 square feet of space located at 150 East 42nd Street to be used to consolidate corporate services of MSHS. The space replaced existing leased and owned office space to provide additional capacity for clinical and research activities. A leasehold condominium interest was purchased by the Hospital and, shortly thereafter, transferred to a special-purpose, limited liability company formed by the Hospital. The Hospital financed the purchase through the issuance of a promissory note payable with a principal amount of approximately $110.1 million, interest at a rate of 8%, and payments beginning June 2015 and ending in March Payment of interest was deferred from August 2014 until May The Hospital and the School guaranteed, on a joint and several basis, all of the obligations of the Hospital which include note payments, operating expenses, taxes and other carrying costs and charges, some of which escalate annually. The property is collateral for the related financing. 6. Investments Total investments for the School are maintained as follows (in thousands): December Short-term investments $ 46,979 $ 16,482 Pooled investments 659, ,372 Non-pooled investments (marketable and nonmarketable, net) 20,702 20,987 $ 726,942 $ 754,841 24

27 6. Investments (continued) The following table summarizes the composition of the investment pool at December 31, 2015 and 2014 (in thousands); the School s interests in the pooled investment components are proportionate based on the ratio of its pooled investment balance to the total of the pool. December Cash and cash equivalents $ 22,604 $ 54,166 Fixed income: Mutual funds 46,750 29,562 Equities: U.S. equities 102, ,272 Global equities 42,026 40,249 Non-U.S. equities 105,819 97,076 Alternative investments: Hedge funds: Long-only equity 174, ,584 Hedged equity (a) 230, ,936 Long/short credit (b) 46,276 45,909 Multi-strategy (c) 132, ,938 Open mandate (d) 285, ,245 Macro (e) 93, ,973 Private equity: Equity (f) 35,382 32,735 Credit/distressed (g) 93, ,673 Real assets (h) 56,895 33,515 $ 1,468,608 $ 1,509,833 (a) Investments, consisting primarily of publicly traded equity holdings with both long and short positions. (b) Investments, consisting primarily of publicly traded credit holdings with both long and short positions. (c) Investments with lower correlations to stock and bond markets with a balanced mix of assets and strategies. Underlying exposures primarily include publicly traded equity and credit positions in event-driven, relative value, and various arbitrage strategies. 25